The Surprising Truth
The Surprising Truth
18 months into the controversial Opportunity Zone tax incentive for distressed neighborhoods, some hopeful lessons...and some remaining questions
Jul. 26, 2019
Eighteen months accept passed since the Opportunity Zone incentive created a renewed focus on investing in America'south economically distressed neighborhoods. Through our respective piece of work, in close collaboration with Accelerator for America, we have traveled to over 50 communities beyond the U.S. to understand and aid implement pieces of this new way to invest in American communities.
The national conversation around Opportunity Zones has been hyperbolic and oversimplified. Opportunity Zones, it seems, are binary: either they are going to lift distressed areas out of poverty , or are a big Wall Street taxation break that volition accelerate the worst of gentrification. Yet equally we get out of New York and Washington, D.C., and meet what is happening on the ground in American communities, the story is far more fascinating and complex.
A year and a half in, here are 5 surprising lessons for Opportunity Zones—and five large questions we have.
1. Opportunity Zones are a focusing event for a much-needed new organisation of "customs wealth" that goes far beyond a minor tax incentive. We've been in town halls in places from Erie to Houston that accept attracted hundreds of residents to discuss potential projects, and we have hardly heard the discussion "Opportunity Zone" or "uppercase gains taxation." Residents, developers, and entrepreneurs want to talk about projects and plans—how to renovate this abandoned school or restore local retail or grow minority-owned businesses or build workforce housing.
Two years ago, we never would take expected investing in communities to have garnered this type of attending, but the Opportunity Zone incentive is ushering in a refreshed and much-needed new look at pent upwardly demand for economic activity in American communities.
The nearly interesting deals nosotros are seeing are local, interdisciplinary and rooted in community…with local leadership and local capital. In the cities nosotros visit, nosotros come across local landowners, entrepreneurs, and stakeholders wanting to work with capital sources that they know are invested in the community for the long term.
This requires a key shift in emphasis from the existing system that is (1) housing-centric, (two) low-income concentrated, (3) subsidy-dependent, and (4) grant-driven; and it's happening. Nosotros are seeing new funds and organizations form that are (1) neighborhood-centric, (2) mixed-income, (iii) dependent on a coordinated "upper-case letter stack" of market-driven disinterestedness, debt, and smart philanthropy, and (4) entrepreneur-driven.
Very little of this chat involves capital gains tax incentives. But it's sorely needed, and the actors who cover the new system volition succeed.
two. The worst-case scenario, "oceans of Wall Street upper-case letter volition gentrify America," doesn't seem to exist coming true. These funds are struggling to get off the footing, while the nearly compelling deals remain small and local. The New York Times and Wall Street Journal accept been filled with doomsday headlines suggesting that large firms volition raise billion-dollar funds that will "cherry-red-selection" areas most ripe for gentrification. Frankly, we aren't seeing this play out in existent time, although the absenteeism of national reporting requirements requires caution.
But there are several constraints built into the marketplace. The Opportunity Zone 
incentive requires investors to raise and deploy capital letter inside the span of well-nigh 12 months, which means that large national funds that do not have local presences in target markets, even if they were able to heighten $1 billion+, could non deploy information technology well. On-market place properties in a small subset of Opportunity Zones which would be brokered to these big national players have very high valuations, where the revenue enhancement incentive is already baked into the belongings toll. And the vast preponderance of designated Opportunity Zones, as the Economic Innovation Group has reported, are shortly characterized past loftier poverty and low market need, which is why they were chosen in the offset place.
The most interesting deals we are seeing are local, interdisciplinary and rooted in community … with local leadership and local capital. We are going to picket this space closely, merely we don't conceptualize that the bogeyman of faceless national billions volition destroy cities through Opportunity Zone investment. In the cities nosotros visit, we see local landowners, entrepreneurs, and stakeholders wanting to work with capital sources that they know are invested in the community for the long term.
3. Developers and entrepreneurs of color are seeing new paths to marketplace where they don't have to ask for permission. Ane of the very real struggles of the by generation of community development is that likewise many promising entrepreneurs take been in bullheaded spots. Real estate and business investment in communities has been grant and program-driven, requiring anyone with an idea to know where to use for a specific program, who to work with to become a carve-out, and how to fit into an existing power structure. It has depended on who you know in order to raise capital.
The Opportunity Zone legislation has somewhat upended the way that capital is flowing into economically distressed communities, and we are seeing a new moving ridge of developers and entrepreneurs with new opportunity.
4. Cities and foundations are building needed infrastructure whose impact goes far across Opportunity Zones. In some cases, we have seen foundations and cities have the pb in creating infrastructure for successful Opportunity Zone funds. Absent an affect evaluation framework, the US Alliance for Impact Investing and the Beeck Center at Georgetown created a national serial of principles for investors to follow in bear on evaluation. Local foundations such as the Kauffman Foundation in Kansas City take been convening stakeholders across the community to develop a serial of investable projects with customs buy-in. Foundations like Rockefeller and Prudential in Newark and Abell in Baltimore accept funded roles in the cities to assist coordinate private OZ investment with projects of public priorities. And Accelerator for America is working with foundations to fund FUSE fellows to add chapters in fundamental cities. These public-facing infrastructure roles volition assist capital flow more responsibly.
5. Local stakeholders are asking for loftier standards on the touch on that Opportunity Zone investments volition have. At that place has been a major worry at the national level about the lack of reporting standards for Opportunity Zones, and that without reporting standards, OZ investments volition not have impact. While nosotros believe that reporting standards (and the information collection that comes with information technology) would be a critical adjacent step in the legislation, locally, we are finding governments and individuals are property projects to a very high standard.
The New York Times and Wall Street Journal have been filled with doomsday headlines suggesting that big firms volition raise billion-dollar funds that volition "scarlet-selection" areas most ripe for gentrification. Frankly, nosotros aren't seeing this play out in real time.
We have talked to landowners of big, bonny tracts in OZs who are longtime community residents and will but sell choice backdrop to developers and investors who accept the community'south best interest at heart. We take also seen cities like Atlanta and Erie take stock of their holdings and make sure that any investor who does business organisation with the metropolis has impact at eye. Impact standards are happening, and local communities are leading the way.
Five questions
These observations give u.s. hope. Yet there are 5 unanswered questions that nosotros conceptualize will play out over the next 18 months. Any successful OZ investor—both if they are seeking financial returns and seeking positive community affect—will need to successfully answer these questions.
ane. Will a new wave of community institutions develop—or will this only succeed deal by deal? Federal laws in the past accept helped spawn institutions that tin deploy capital and spur investment at scale; Community Evolution Finance Institutions were arguably a production of the Community Reinvestment Human action. Opportunity Zones are already favoring cities with institutions like the Erie Downtown Evolution Corporation that take the capacity and capital to ready the table for market investment. Replication of the Erie model (which itself is modeled on the Cincinnati Center City Development Corporation) could exist a foundation for large scale transformation. Additionally, Opportunity Zones might spur the creation of multi-asset funds and intermediaries to bulldoze projects in sub-geographies that bear similar characteristics, such as central business concern districts in small cities.
ii. Volition OZs motion across one-off deals to community strategies? Currently the largest investors in OZ projects are one-off transactions: investors who have large capital gains and are re-investing them into OZs. Many of these investments are 1-off: "I had a big gain, and I saw a real estate bargain, so I re-invested the proceeds." We are offset to see thoughtful strategies investing in multiple deals and businesses around commercial hubs in depression-income communities, frequently located most hospitals and other anchors, which could form the ground of concentrated, ongoing investment.
3. Tin can foundations play a role in upper-case letter germination? Some foundations have been very active in inclusive investment with the 5 percent of their capital base that gets allocated every year. Even so the worry from many foundations that Opportunity Zone investment will not exist mission-aligned is somewhat apropos given that 95 per centum of most foundations' endowments are also not aligned with the purpose of the foundations. Will foundations invest in mission-aligned projects with their 95 percent? The Kresge Foundation has taken a first step, providing $22 million in credit guarantees to two OZ funds, merely others can follow.
four. Can we motion from transactions to wealth building? " Equity" has 2 meanings in the Opportunity Zone context: the risk capital letter invested in Opportunity Zone transactions and the potential for Zone investments to build wealth for community residents and entrepreneurs. New legal structures as well every bit new ecosystems for identifying, growing, supporting, mentoring and capitalizing minority-owned businesses and developers must be created and widely applied if the second meaning of "equity" is to accept concord.
five. Can we move from one-off to routine? The power of markets is the power of routine and the application of common information, assumptions and instruments. We take already written about one prototypical bargain concept: "street corners" in depression-income neighborhoods that co-locate small businesses, growth companies, health clinics and community services. We believe many more are possible, especially in Opportunity Zones that include or are located nearly hospitals, universities and other anchor institutions.
Ross Baird is CEO of Pattern Local and author of The Innovation Blind Spot . Bruce Katz is the inaugural director of the Nowak Metro Finance Lab at Drexel Academy and the co-author (with Jeremy Nowak) of The New Localism: How Cities Tin Thrive in the Age of Populism .
Source: https://thephiladelphiacitizen.org/the-surprising-truth/
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